Page 530 - Introduction to Business

504 PART 5 Finance

regulatory policy and financial systems. For banks, the changes have meant the
purchase of securities and insurance firms to expand their services into those areas.
Also, banks have been increasing in size through mergers and acquisitions. Larger
banks are needed to compete on a national and global level.
Recent changes in the banking industry are causing the following:
• A decline of the traditional banking model in which banks collect deposits and
make loans
• An increase in nontraditional banking services including securities, insurance,
electronic payments services, Internet banking, and so on
• Cross-selling to customers by first offering deposit accounts and loans to them
and then following up by selling other financial services
• A blurring of the definition of a bank to encompass the wide variety of services
banks can now offer customers
• More emphasis on initially identifying customer needs and then designing
products and services to meet those needs
These trends are causing banks to diversify into new financial services. At the
same time, banks must carefully consider which services to offer by identifying
market or customer demand for services. Also, the bank must have personnel with
the necessary expertise to competently deliver those services.
A controversy that arises with the formation of large, multiservice banks is
whether they will be viable or able to survive in the long run. Proponents argue that
diversification into a variety of financial services will reduce the risk of banks. Also,
modern banks will be better able to meet the convenience needs of customers by
offering one-stop financial supermarket shopping. On the other hand, opponents
argue that banks should specialize by concentrating on fewer, specific types of
financial services. By specializing, banks can take advantage of management
expertise and avoid coordination problems involved in managing a firm that is
spread out over a wide assortment of financial services. Should banks put all their
eggs in one basket or not? Is diversifying or specializing the best strategy?

Savings and Loan Associations and Mutual Savings Banks. Known
also as cooperative banks and building and loan associations in some countries,
thrift institutions Depository institutions these so-called thrift institutions are primarily home lenders. In the early 1900s
that are primarily home lenders they offered savings accounts and made home loans to individuals, who normally
could not obtain financial services from commercial banks. By promoting thrifti-
ness among individuals and contributing to the development of communities,
these institutions became an important part of the financial system. Unfortunately,
many thrifts had problems with adapting to the deregulation of financial services
that led to many failures and mergers in the 1980s and 1990s. Today, while they are
still involved in consumer finance and home lending, their role is diminished due
to competition from banks and other financial service firms in their traditional
product areas. As part of the structural changes in the banking industry, many of
these thrifts have opted to become subsidiaries of banking organizations.
Credit Unions. These thrift institutions are consumer-oriented like other
thrifts but are different due to their not-for-profit organization status. There are no
shareholders of such firms; instead, the depositors and borrowers are the owners.
Because they are not-for-profit organizations, they pay no state or federal income
credit unions Not-for-profit thrift taxes and can use volunteer labor. To retain their not-for-profit status, they can only
institutions that have members with a sell financial services to customers who satisfy a common bond requirement. Some
common bond, such as employer,
religious group, and educational typical examples of a common bond are employer, religious group, and educational
institution institution. Credit unions are most active in small consumer loans for furniture,

Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.